It's all about how finally, it seems, there's a serious
counter-weight to the German idea that austerity is the only way
forward.

With political allies weakened or ousted, Chancellor Angela Merkel’s seat at the head of the European
table has become much less comfortable, as a reckoning with
Germany’s insistence on lock-step austerity
appears to have begun.

“The formula is not working, and everyone is now talking about
whether austerity is the only solution,” said Jordi Vaquer i Fanés, a
political scientist and director of the Barcelona Center for
International Affairs in Spain. “Does this mean that Merkel has
lost completely? No. But it does mean that the very nature of the
debate about the euro-zone crisis is changing.”

...

From trading floors to polling stations to the streets of cities
across Europe, the message appears increasingly to be that
countries cannot cut their way to fiscal health. They need
growth, too. In recent months, powerful voices have joined the
chorus, including those of the managing director of the
International Monetary Fund, Christine Lagarde, and Italy’s prime
minister, Mario Monti. Treasury Secretary Timothy F. Geithner has
called repeatedly for Europe to defer budget cutting in favor of
some form of stimulus spending.

In thinking about it this way, this certainly puts a very
positive light on the developments of this weekend, where
right-wingers in the Netherlands and France stunned the political
establishment. And in fact in France, both of the remaining
candidates (Hollande and Sarkozy) are pushing back against
Germany. Hollande explicitly wants Eurobonds, and a renegotiation
of the fiscal compact. Sarkozy has been talking lately about
having the ECB do more, a specific rebuke of the German hard
money ideal.

The fact of the matter is that not only has austerity not worked,
and not only has austerity been devastating to the economy,
austerity has exacerbated the very problem it was meant to
address, which is sovereign debt dynamics.

The most glaring example of this is in Spain, where yields really
started to spike in the wake of reform announcements.

The isolation of Germany was probably inevitable if only looking
at this chart of PMIs across Europe.

With the French economy tanking, you really do just have Germany
on one side of things and everyone else on the other.

How long could that go on before everyone else started to catch
on that they were getting a raw deal.

And it's tough to overstate just how fantastic the status quo has
been for Germany.

This chart of French vs. German unemployment over the past decade
or so speaks volumes.

SocGen

And of course, Germany's borrowing costs are the envy of the
world. Here's a look at the 5-year bond, which just hit a record
low yield.